The 10 Best Ways to Spend Your Tax Refund

It's that time of year again when many of us get a check back from the government. For many of us, this is a windfall that we look forward to every year. The question is, what should we spend it on? Here are a few options for anyone wondering what to do with it once the check is in hand.

10) Pay off any credit card debt. I don’t care if you have an interest rate of 0% or 28%, pay it off. Whatever amount you are paying on that debt every month then gets freed up to be spent in better ways, like building an emergency fund, paying off a secured loan, or using it to buy necessary items so you don’t build up more credit card debt. Plus, if you pay off a debt that was charging you 19% interest, that is the investing equivalent of getting a 19% return, and it is guaranteed. You let me know if you can find any other way to get a guaranteed 19% return.

9) Start or replenish your emergency fund. If you don’t have an emergency fund, you need one. There is a process that we use for our clients to determine the appropriate amount in the fund, but for ease of calculation, 3-6 months of expenses is a good estimate. This fund is in place for those times that hit us all, but you can’t plan for when they will happen. Medical emergencies, job loss, emergency travel to care for a loved one, etc… As a financial planner, I can’t stress to you enough how important this is. If you don’t have an emergency fund, you are more likely to either incur debt (credit card debt) or raid your investments for emergency money. Nothing can throw your plan off track quicker than those two things.

8) Fund an IRA for next year. Why not? Doing this at the beginning of the year gives it an extra year to grow tax deferred (or tax free in a Roth). Plus, the traditional IRA will be a deduction for next years taxes, so you are helping yourself to get a bigger refund next year.

7) If you don’t own a house, why not put your tax refund towards building a down payment? If you plan to buy in the next 5 years, put the money in a safe, liquid investment like a savings account, money market, or CD. If you care not looking at buying for more than 5 years, you can take more risk with the money and boost your return in the stock market.

6) If you own a house, use your refund to make an extra payment. An extra payment that goes entirely towards principal will help you pay off your house faster, which may help you retire earlier. The biggest monthly expense that most people have in their lives is their house. Can you imagine not having that monthly expense?

5) Another idea if you own a house would be to put your refund towards a renovation. Not only do you get to enjoy the result of that work, but in many cases that is a good investment that will return money to you when you sell. Kitchens and bathrooms are widely considered the renovations that have the best return on investment.

4) If you have kids, put the money in a 529 plan. Last time I checked, college wasn’t getting any cheaper. If you plan on paying for your kids to go to college, a 529 plan is a great way to get tax free growth to pay for their future expenses. The FL Prepaid Plan is another excellent option.

3) Start a vacation fund, or if you don’t take vacations, start a Christmas fund. The idea here is to prepay for your future expenses. Good planners always look ahead to see what expenses are coming, and make sure they can cover them. Vacations and holidays are one time expenses that happen every year, but many people try to just cover them out of their monthly cash flow. How many people have enough free cash flow every month to pay for a $2000 vacation or $500 worth of Christmas presents?

2) Make a charitable donation. If you are the type of person that likes to give back, this is a great time of year to do it. Not only will you feel better about yourself when you help others in need, but you get a tax deduction for your generosity. However, helping out your cousin Eddie who has fallen on hard times while he is holding out for a management position won’t qualify you for a deduction. The money has to be given to a qualified charity.

1) Give yourself a raise! If you are getting a tax refund every year, you are essentially giving the government an interest free loan. This is something they will not do for you, so don’t extend the courtesy back to them. Now, if you are one of those people that just can’t save a dime no matter how much money comes in, and the only way to do it is to overpay your taxes each month, then by all means continue this strategy. However, if you are not like this, why not give yourself a raise? A $3000 refund over 12 months is $250 of after tax money in your paycheck. Could you find a good way to use an extra $250 per month? I know I could. There are several good online calculators that you can use to tell you how many exemptions to claim to pay the right amount of taxes.

If you are not sure which of these choices is best for you, schedule a visit with a fee only financial planner to help you through the process. Or even easier, send me an email at info@vanwiefinancial.com, and we can help guide you through the decision making process.